Swot, pest and Porter’s Five Forces Analysis of Gap Inc

The fashion business industry is very dynamic due to the numerous factors that influence it. For instance, new trends emerge rapidly while existing ones are discarded as fast. Proliferation of several designer labels has ensured that the industry is highly competitive because customers have more purchasing options.  One of the key players in the fashion industry is Gap Inc. This company, which also deals with the retail of accessories and care goods, has been performing well in the global fashion market until recently. It is for this reason that the company has been chosen for strategic business analysis.

Background

Gap, Inc. is a specialty retailer operating retail and outlet stores worldwide. The company specializes in selling casual apparel, accessories, as well as personal care goods for women, men and children. Although it has weakened considerably, Gap Inc. is still considered a key player in the clothing market international. The company operates under the brands Gap, Old Navy, banana republic, Forth & Towne and brands. The retailer has stores in various nations comprising: the U.S, Canada, the U.K France, Ireland, and Japan. Additionally, the company has franchised outlets in, Indonesia, Oman, Qatar, the United Arab Emirates, Cyprus,  Jordan, as well as  and Croatia. In 2009 they had the top market share in the United States family apparel business.  Gap Inc. had 3,157 stores in the abovementioned countries as of January 2007. The company’s business strategy is focused on strengthening its core mainstream and investing in parts of future development primarily travel related services. Its policies are built around its dream of going further to make visions come true. Moreover the company aims to provide long term exceptional services to its shareholders

Swot and pest analysis of Gap

The PESTEL analysis is a theory used to analyse six main factors in the external environment that affect the performance of a firm in a market. The factors include: political, economic, social, and technological segments.

Political effects

            The political scene is the United States of America, where the company originates and has its headquarters is relatively stable. The governance of the U.S. is democratic in the sense that various bodies are given freedom of speech and association. The government has also deregulated some companies and passed laws that control monopolistic control of markets. The country has also enacted trade agreements with foreign countries. This has enabled Gap to not only conduct business in foreign countries but also source for labour and raw material.

Economic Factors

This refers to the nature of the economy in which an organization operates. Some of the factors considered in the economic segment include: inflation and interest rates, trade deficits and surpluses, budget deficits and surpluses and gross domestic product. The economic segment greatly affects international organizations and the amount of revenue generated by a firm is dependant on several factors.

One of these factors is production costs; which greatly vary due to fluctuations in the cost of materials. Another factor is the rate of economic growth. For instance, inflation and natural disasters do play a great role in determining production costs. Another key factor in the economic segment is the consumers’ buying or spending power. Foreign currency volatility also affects the economic segment. For instance, when the Unites S. dollar depreciates as experienced in 2004, pressure is exerted on companies that have United States dollar income with foreign currency cost. This is compounded by the move by central banks to support respective financial systems. The move by foreign investors to move to more stable economies also weakens local currencies therefore worsening the effects of foreign currency instability.

For organizations such as Gap Inc. that operate on a global scale, the economic situations in both domestic and international markets affect revenues . For instance, elimination of trade barriers in international markets through mechanisms such as the World Trade Organization (WTO) and the European Union (EU) foster favourable business environments .

Technological Factors

Technological changes have become a key driver of competition among international organizations.  The technological segment entails translation of knowledge into new products and processes. On the side of consumer appeal, creation and use of knowledge is currently focused on improving and influencing healthier choices and to some extent, environmental sustainability.  On the side of manufacturers, it is focused upon improving efficiency in production through automation of most processes. Gap Inc. should increase research in this area to gain competitive advantage over rivals.

Environmental Factors

Environmental factors such as the climate of a region affect the kind of products that customers are likely to purchase. For instance, Gap Inc. being an apparel retailer should be conscious on the kind of clothes likely to sell in particular regions. For example, heavy clothing meant for cold climates cannot sell in hot tropical regions during the hot season; the reverse is true.

Another important issue is environmental friendliness. Currently, businesses entities are continually embracing the concept of “going green.”  Environmental responsibility is one of the factors affecting Gap Inc. According to the company’s policy, other than selling “green” products, the company is trying to ensure that everything about it green. This concept is achieved through products such as saving energy and combating climate change through effective waste management. The company has also put in place strict measures to ensure that its suppliers are also environmentally friendly.

Legal Factors

Given that Gap Inc. operates on a global scale, the company has a challenge of complying with various domestic, regional, and international laws. The most common comprise of: discrimination law, antitrust law, occupation law, and health as well as safety law. These laws directly or indirectly affect how the company operates and operational costs incurred. Gap Inc. has put in place a comprehensive corporate compliance program that is meant to ensure that all its employees and management “not only meet legal requirements around the world, but also operate responsibly and with integrity in everything they do” .

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Porter’s Five Forces Analysis of Gap Inc

Competition from Rivals

The introduction of new trends in fashion makes industry extremely dynamic. Since the customers have many options to purchase clothing, switching costs are low. It is therefore important that the companies are able adapt to new trends so as to attract consumers and create brand loyalty.

Competition from New Entrants

In the fashion industry, the barriers to entry are very high. Therefore, it is of utmost importance for a corporation to have high brand perception because to the low switching costs. This strategy makes it difficult for new entrants to come into the industry and outdo existing brands. This is because they will not enjoy brand loyalty. It has been observed that consumers have a tendency of sticking to the clothing brands that they like will therefore continue to shop for the same brands if they become loyal to the company. For this reason, companies that want o be successful have to build on brand loyalty.

Substitute Products

In the fashion industry, alternative methods of acquiring designer clothes to shopping at clothing stores are very limited. It is for this reason that competition from substitute products is weak. The most common substitutes are making clothes and wearing those passed down from others. Both of those options are not appealing because of the time involved as well as differences in tastes and preferences between individuals for the option of wearing hand-me-downs.

Supplier Bargaining Power

Like Gap Inc., most companies in the fashion industry do not manufacture their own clothing but rather acquire them from suppliers whom they give instructions regarding style and/or design.  Because of the large number of textile manufactures across the world, bargaining power is weak. Consequently, the suppliers are unable to charge high prices for fear of losing contracts to competitors who may offer the same goods and services at a cheaper price.

Customer Bargaining Power

Customers have high bargaining power when it comes to the fashion industry. One of the reasons is the low switching costs from one store to another. When a customer becomes dissatisfied with the quality or pricing of a certain store’s clothes, the consequence is that they will switch to a rival store. Therefore, if a store desires to retain its customers, it is imperative that it offers them the best in terms of quality, price and trend.

SWOT Analysis of Gap Inc

Strengths

Gap’s main strength is its Global appeal. Some individuals will want to identify with another culture’s values if they perceive it as superior to theirs. Gap Inc. is globally recognized as an icon of American style and pop culture. Therefore, individuals who would want to be identified with American style will naturally go for Gap merchandise.

Another major strength is the company’s global presence. Its stores are located in several countries across the world, which include: the U.S, U.K, Japan, France, Canada and Ireland among others.  As of January 2010, the company had a total of 3,095 stores across the world. Other than the company-owned stores, it also has Franchise stores in some countries such as Turkey, United Arab Emirates, among others.

The franchising system in itself has helped the company to increase its global presence. GAP has franchise agreements with unaffiliated stores to operate Gap or banana republic brands stores all over the world. The company’s multiple brands, like Gap, Old Navy, and Athleta as well as brand extensions like GapKids, gapbody as well as GapMaternity are factors that give it competitive advantage over rivals.

Weaknesses

One of Gap’s major weaknesses is that almost all of its merchandise depends on third-party vendors, most of which are outside the U.S.; Approximately 1000 vendors in 60 countries. In terms of supply, 27 percent of Gap merchandise is produced in China. This has the risk of product shortage, shipment delay and increased costs.Another weakness is Gap’s large store base; which includes unaffiliated franchisees. For this reason, Gap finds it difficult to keep up with fashion trends and in ensuring quality control.

Another significant weakness is Gap’s clothing; which are not trendy as compared to those of rivals. For this reason, consumers who are interested in trendy clothing switch to Gap’s competitors. This is perhaps the reason why Gap Inc. saw a drop in sales during the 1999-2000 period.

In the fashion industry, being able to control the production processes is a key factor.Gap has been unable to control its production process due to the large number of suppliers and stores (including the franchised ones).

Conclusion

Whereas Gap Corporation has a lot of weaknesses as well as problems facing it, it has made a lot of advancement in addressing these problems. As it continues to expand in the international market, the company should consider reducing costs so as to increase profits. This can be achieved through measures such as: introduction of stores in new markets, creating new brands, engaging more in CSR, and research and design.

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